Dollar on back foot as tax deal doubts weigh, Aussie looks to jobs data

By Hideyuki Sano

TOKYO (Reuters) - The dollar was on the defensive on Thursday as doubts on the prospects of U.S. tax reforms offset an uptick in underlying U.S. inflation while the Australian dollar hovered near four-month lows ahead of key local jobs data.

The dollar index fell to as low as 93.402 on Wednesday, its weakest in almost four weeks, and last stood at 93.851 for a 0.6 percent loss so far this week.

A Senate Republican tax plan drew fire from two Republican lawmakers on Wednesday in a possible sign of trouble for the sweeping measure, given the party can afford to lose no more than two votes from their ranks.

"For the moment, the U.S. tax cuts will be the main theme of the markets. I would expect negotiation to drag on beyond the year-end but by the first quarter of next year, there will be a deal," said Yukio Ishizuki, senior strategist at Daiwa Securities.

Signs of a set back in the U.S. tax reform plans, which have been a primary driver of the dollar recovery since September, were enough to offset a boost to the currency from U.S. consumer inflation and retail sales data.

Annual core inflation accelerated to 1.8 percent in October after having stayed at 1.7 percent in the preceding five months. Retail sales increased 0.2 percent.

Both beat market expectations slightly and further firmed up the case for a December rate hike by the Federal Reserve. But beyond this year, U.S. interest rate futures were pricing in a slightly smaller chance of a rate hike early in 2018 than before Wednesday's data.

On top of that, the fall in U.S. share prices and junk bonds in recent days also made investors cautious.

As the dollar faced head winds, the euro traded at $1.1774 , after having risen to as high as $1.1862 on Wednesday, its best level in over one month.

The dollar dipped to 112.47 yen on Wednesday and fetched 112.87 yen in early Asian trade.

The Australian dollar hit a four-month low of $0.7574 the previous day on surprisingly weak reading on wages. It was last at $0.7587 .

The upcoming local jobs data due at 0030 GMT is the next biggest test for the currency.

Against the yen, the Aussie hit a three-month low of 85.56 yen , having posted its largest daily loss since mid-August.

(Editing by Shri Navaratnam)